Methods for calculating ECPI

There are two methods for calculating the amount of ECPI a SMSF can claim:

segregated method

proportionate method.

Generally the method used depends on whether a SMSF's assets are 'segregated', meaning there are specific assets supporting retirement phase income streams which are clearly held separate from any other assets the fund holds in accumulation phase.

A SMSF may be required to use one of the two calculation methods in some circumstances.

Segregated method

When using the segregated method to calculate ECPI, all of the income from 'segregated current pension assets' is ECPI.

Assets of a complying fund are segregated current pension assets at a time if the assets are specifically identified as supporting retirement phase income streams and the income from these assets has the sole purpose of funding payment of retirement phase income streams.

Capital gains and losses are disregarded if a capital gains tax event occurs in relation to a segregated current pension asset.

Usually the value of the assets supporting retirement phase income streams will equate to the value of those income streams. However, if the market value of the assets supporting retirement phase income streams exceeds the sum of the account balances of those income streams, the assets cannot be segregated current pension assets to the extent they exceed the account balances.

For some retirement phase income streams that commenced prior to 20 September 2007 the assets supporting these income streams can only be segregated current pension assets if the fund obtains an actuarial certificate. The actuarial certificate verifies that the assets and expected earnings are sufficient to pay, in part or full, the income stream's liabilities as they fall due.

Proportionate method

When using the proportionate method to calculate ECPI a SMSF does not set aside specific assets to support retirement phase income streams.

Instead, the SMSF determines the 'exempt proportion' of income based on the proportion of the fund's total liabilities that are current pension liabilities. Generally this will be the proportion of the fund's total account balances that are retirement phase income streams. This exempt proportion is averaged across the period of the year the fund used the proportionate method. It is determined by an actuary who provides an actuarial certificate.

The exempt proportion is then applied to the SMSF's total assessable income for the period to determine the amount that is ECPI.

A SMSF cannot use the proportionate method to calculate ECPI during periods when fund assets are segregated current pension assets.

When a SMSF must use a particular ECPI calculation method

Use the segregated method when a fund is 100% in retirement phase

If all of the interests in a SMSF are retirement phase income streams (that is, there are no accumulation accounts), it is considered that all of the fund's assets are held 'solely' to support retirement phase income streams.

This is called being '100% in retirement phase' and our position is that all of the fund's assets in these circumstances are segregated current pension assets (provided they are not disregarded small fund assets).

For any portion of any income year where a SMSF is in 100% retirement phase and does not have disregarded small fund assets, ECPI is calculated using the segregated method.

A SMSF may need to switch its method for calculating ECPI if it becomes 100% in retirement phase within an income year it has used the proportionate method.

This may happen if one member is receiving a retirement phase income stream and another who has been in accumulation phase commences a retirement phase income stream part way through the income year.

In a case like this, the SMSF will claim ECPI using the proportionate method for the first part of the income year. For the second part of the year when the fund is 100% in retirement phase it will need to use the segregated method.

Use the proportionate method when a fund has disregarded small fund assets

From the 2017-18 income year, if a SMSF has at least one retirement phase income stream at any time of the year and:

a fund member has a total superannuation balance over $1.6 million immediately before the start of the relevant income year

that member is receiving a retirement phase income stream from any source including the SMSF or another super provider

the SMSF will need to use the proportionate method to calculate ECPI for all members for the entire income year.

The fund's assets are disregarded small fund assets, and will not be segregated current pension assets even if the fund is 100% in retirement phase.

This change only limits a SMSF to using the proportionate method for the purposes of calculating ECPI. It does not limit a fund from segregating its assets to accommodate member investment choices. Nor does it reduce the amount of ECPI a fund is able to claim, it just means the amount is calculated using the proportionate method.

When the ECPI calculation method can be chosen

When:

a SMSF is paying a retirement phase income stream

the fund is not 100% in retirement phase (for example if some of the fund's assets are supporting accumulation interests)

the fund may choose to use either the segregated method or the proportionate method to calculate ECPI for the income year.

It is important to note if a SMSF which is 100% in retirement phase receives a contribution or rollover, it ceases to be 100% in retirement phase as the contribution or rollover will be in an accumulation interest. However, the SMSF does not automatically need to switch to the proportionate method.

The segregated method allows a fund to segregate assets to support retirement phase income streams and segregate other assets to support other interests such as accumulation accounts.

As long as the fund actively segregates the assets, such as by holding the contribution or rollover in a sub-account or separate bank account (following Taxation Determination TD 2014/7) the fund can continue to use the segregated method.

The fund would only be required to use the proportionate method if it chooses not to keep its assets segregated. If the fund chooses to do this, the member account balances at the time of the switch should be recorded for the purpose of obtaining an actuarial certificate covering the period the proportionate method is used.

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.